Suggested Managing Debt Articles

When John Oliver announced Sunday night that he’d purchased medical debts as a faux collector and forgiven those debts, the Last Week Tonight host’s actions led to a serious question: Couldn’t this strategy be used on a wide scale? After all, Oliver managed to forgive about $15 million in debt for only $60,000.

It’s a clever idea that has its roots in the Occupy Wall Street movement. Back in 2012, a group calling itself Rolling Jubilee began doing precisely the same thing. It raised money to purchase debts, then told the debtors their bills were forgiven.

While Rolling Jubilee initially focused on medical debt, as Oliver did, the organization now focuses on student loan debt. It claims to have abolished nearly $32 million in debt and raised $700,000.

Oliver actually executed the debt forgiveness by transferring the “paper” to a non-profit named RIPMedicalDebt.org, which was set up to mimic Rolling Jubilee’s strategy, according to the site.

Get Your Free Credit Score & Monitoring

But debt forgiveness using this strategy raises many questions. Chief among them: As Oliver said, his $15 million “giveaway” was really just a drop in the bucket. The Consumer Financial Protection Bureau says that 43 million Americans have an unpaid medical bill on their credit reports. That means Last Week Tonight would have to do roughly 4,777 more episodes to help all those folks.

The Impact on Credit Scores

Debt-buying-and-forgiveness highlights some other interesting issues. As many Credit.com readers know, the real pain from an unpaid bill isn’t necessarily harassment by a debt collector. It’s often the credit score punishment that follows, which can force a consumer out of typical market transactions. Low credit scores can prevent a consumer from buying a home, a car, or even from getting a credit card.

It’s impossible to say what impact this kind of debt forgiveness would have on an individual consumer’s score — scores are calculated using multiple personal factors. But generally we know that when a debt is marked as settled, or anything other than paid in full, that’s very bad for a score. The negative impact shrinks over time, but it can last seven years. According to this chart from FICO, a settled debt can cause up to a 100-point credit score drop.

We know that the debt Oliver purchased was described on the show as “out-of-state medical debt from Texas,” meaning it was older than that state’s statute of limitations for collection — which in Texas is four years. In that case, the impact from the four-year-old-plus debts may be low, but in many cases, it will still hurt those consumers, even after their debt was “forgiven.”

There’s another silver lining about the debt Oliver purchased: Newer formulas used for credit scores, including FICO 9 and VantageScore 3.0, treat medical debts differently, so that should help some of these consumers, too. Those formulas are slowly making their way through the credit industry.

“Assuming that Mr. Oliver’s debt purchasing company reported these debts as consumer accounts to the credit bureaus, and then updated the accounts to reflect that the debts were ‘satisfied’ (for example, that the outstanding balance was zero), then there could potentially be a positive impact on the FICO Score 9 score,” Ethan Dornhelm, principal scientist at FICO, said in an email. “FICO Score 9 ignores paid collection agency accounts, and it takes a sophisticated approach to differentiating medical from non-medical collection agency accounts. This helps ensure that medical collections have a lower impact on the FICO Score, commensurate with the credit risk they represent.”

But it bears repeating: A forgiven debt does not mean there are no consequences for failing to pay the debt.

Paying Old Debt

The fact that debt-purchases-for-forgiveness often involve out-of-statute debt raises interesting questions as well. Generally, consumers have no legal obligation pay such debt. (The statute of limitations timeframe varies by state.) That’s why it is the “cheapest” form of debt for buyers (including Oliver and Jubilee) to buy. When debt buyers try to collect on it, it’s often called zombie debt, and many consumers are tricked into paying when they don’t have to.

Even a small payment towards the debt restarts the statute of limitations, so any consumer who receives a collector call should immediately identify the age of the debt and the applicable statute of limitations.

When Oliver purchased such debt, he was paying a collector who had no right to collect on it. Rainbow Jubilee faced criticism for making such payments, too, which could be seen as helping fund collectors’ illegitimate activity. And the “relief” offered to indebted consumers was already guaranteed by law.

The Tax Implications

Generally, when a debtor forgives a consumers’ debt — say, through debt settlement — the amount of forgiveness is considered income by the IRS. It can be a real kick in the teeth to consumers, who obviously are in no position to pay income tax on the amount they couldn’t pay to a debt collector. But for now, this is the law.

This is sometimes referred to as the 1099-C problem. Financial institutions must issue 1099-C forms to consumers any time they agree to accept at least $600 less than they are owed, and consumers must “claim” that amount on their tax returns.

When Rainbow Jubilee began its debt purchases, the organization said it had consulted with the IRS and was told there was no 1099-C problem. At the time, not everyone agreed. Writing on the blog NakedCapitalism.com, Yves Smith argued that many complex tax issues aren’t settled with the IRS until it makes a formal ruling, and any issues with this kind of novel debt forgiveness were unclear.

While a non-profit may not be required to issue a 1099-C for the “gift” of debt forgiveness, it’s still possible that recipients would have to declare the amount as income. Smith wasn’t saying these consumers had a tax problem, she was merely questioning Jubilee’s certainty that they wouldn’t have one.

On his show, Oliver said that RIPMedicalDebt specialized in debt forgiveness “with no tax consequences.” It is unclear how, however. The organization’s website doesn’t seem to address it. A phone call and an email to the organization were not immediately returned. (That’s not necessarily suspicious — the non-profit’s website was down Monday afternoon, no doubt because it was flooded with traffic in the aftermath of Oliver’s segment). Attempts to reach Rainbow Jubilee have been unsuccessful.

An email to Yves Smith about the issue has also gone unanswered. It’s worth noting that we were unable to find any complaints about unexpected tax issues for recipients of this kind of debt forgiveness.

Can’t Target the Benefit

It’s also worth noting that while buying up debt for pennies on the dollar and forgiving it is definitely good news for the beneficiary, it would be very hard to “target” such debt relief to a particular person. You can’t buy a specific individual’s sold-off debt, for example. The purchases generally involve large spreadsheets with thousands of consumers’ personal information; a good amount of luck would be involved in buying a set of debts that includes a particular person you might be trying to help.

Still, Oliver’s show highlighted many of the absurdities of debt collection, and the alarming practices of some collectors – a subject we’ve covered extensively in the Credit.com Debt Collection Files.

More Money-Saving Reads:

Sign up for our weekly newsletter.

Sign up for our Credit Report Card and receive the latest tips & advice from our team of 50+ credit and money experts as well as a FREE Credit Score and action plan. Sign up now.

Bob Sullivan is author of the New York Times best-sellers Gotcha Capitalism and Stop Getting Ripped Off. His stories have appeared in The New York Times, the Wall Street Journal, and hundreds of other publications. He has appeared as a consumer advocate and technology expert numerous times on NBC's TODAY show, NBC Nightly News, CNBC, NPR's Marketplace, Terry Gross' Fresh Air, and various other radio and TV outlets. He helped start MSNBC.com and wrote there for nearly 20 years, most of it penning the consumer advocacy column The Red Tape Chronicles. See more at www.bobsullivan.net. Follow Bob Sullivan on Facebook or Twitter.

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

faithandhonor

There is moral hazard in this kind of thinking. I hear all kinds of ads on radio, talking about ways to “resolve”, “eliminate”, “nullify”, ad nauseum, but they NEVER say to PAY OFF the debt.

People need to learn how to use credit responsibly. I NEVER carry a credit card balance into the next month, never have, not gonna pay usurious interest and be the slave of the banks.

Medical debt is another matter, and it can crush a person. Student debt… There is NO REASON for students to go into deep debt, with the availability of online courses and KLEP exams. Higher education has become a racket, and is enslaving young people and ignorant people.

Ana Gong

The debt collectors that buy the debt then make up fees and interest and can take up to 10000 on a 15 year old debt, leaving your average working person, penniless. That person then has the nightmare of falling behind again with mortgages, rent, and houshold expenses.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.